The Political Crisis and the Economic Scenario
The merely mild reaction of asset prices to a political crisis as severe as the present one is a puzzle. Of course, market agents are understandably hesitant to bet against a competent economic team that has instruments to intervene in the markets. But in the middle of last week, without any action by the Central Bank, the depreciation of the real in relation to the period just before the latest crisis was very small. We believe this can be attributed to the belief that Temer’s exit will not affect the continuity of the reform agenda.
But there are risks. The first, apparently with lower probability, is that Temer will resist, but in a situation of reduced governability. The second, with higher likelihood, is that Temer will fall and be replaced by someone without sufficient political support to proceed with the reform agenda. In both cases, the paralysis of government decisions will aggravate economic performance, increasing the risk of victory in 2018 by a populist candidate, from the left or right (and there are viable pretenders on both sides of the spectrum).
We believe that despite the strident noise from minority factions with a “the worse, the better” outlook, a responsible majority exists in Congress that, aware of the risk of radicalization of the political forces, will succeed in getting around a sufficiently august and reputable person to replace Temer through indirect election, as specified by the Constitution. This would be the best scenario because it would assure continuation of the reform agenda and maintenance of the current economic team.
Now read on...
Register to sample a report